At the same time, the FBI is investigating four major U.S. financial institutions whose collapse helped trigger the financial crisis.

Congressional leaders still predicted passage of a plan -- with significant changes -- but Wall Street's nerves were hardly soothed. The Dow Jones industrials sank 161 points and now are off more than 500 this week after initially surging on the bailout announcement last week.

Deepening market trouble was just one piece of the economic havoc that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told senators would ensue if Congress lags in acting on the administration's proposal to rescue tottering financial institutions.

"I share the outrage that people have," Paulson said. "It's embarrassing to look at this. I think it's embarrassing to the United States of America. There is a lot of blame to go around."

But without the bailout plan, Paulson and Bernanke sketched out a dire scenario for senators at a contentious daylong hearing: Neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.

Separately, the FBI is looking at potential fraud by mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc. and insurer American International Group Inc., said two officials speaking on condition of anonymity because of the sensitivity of the investigations. The inquiries, still in preliminary stages, will focus on the financial institutions and the people who ran them, one senior law enforcement official said.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation in the past year.

Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment Tuesday evening. A Lehman spokesman did not have an immediate comment.

Over the past year as the housing market cratered, the FBI has opened a wide-ranging investigation of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors.

The investigations revealed Tuesday come as lawmakers began considering whether to approve emergency legislation that would give the government broad power to buy up devalued assets from troubled financial firms.

In public and in private meetings, both Democrats and Republicans said big changes are needed, presaging a difficult road ahead for the measure.

The legislation the administration is promoting would allow the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it should help lift a major weight off the national economy, which is already sputtering.

Democrats were determined to wrest concessions from the administration on domestic spending and middle-class economic aid. And they said Republicans had to share in the politically tricky task of pushing through a financial bailout six weeks before the elections at a time when millions of everyday Americans are economically strapped.

"It's their problem. It's their bill. And they're going to have to figure out if they can support it," House Speaker Nancy Pelosi, D-Calif., said of Republicans.

Sen. Patty Murray, D-Wash., said Tuesday in her first public remarks on the crisis that Congress can't just rubber stamp the Bush plan, and that any plan must include real oversight.

"Nobody wants to have to do this," said Rep. John Boehner of Ohio, the House Republican leader. He said he was hopeful of a quick agreement, despite withering criticism from conservative GOP lawmakers who recoiled at the prospect of federal intervention.

Sen. Jim Bunning, R-Ky., said, "This massive bailout is not a solution. It is financial socialism and it's un-American."

Democrats and Republicans alike demanded that the bailout limit pay packages for executives of companies helped by the rescue.

Democrats also were pushing proposals to let the government take some type of stake in the companies that it helps. The administration has balked at that, fearing it would discourage financial companies from getting the help they need through the bailout, thereby blunting the plan's effectiveness.

Democrats also want to let judges rewrite mortgages to lower bankrupt homeowners' monthly payments, another demand the administration is resisting.

Both Sens. Chris Dodd, D-Conn., chairman of the Banking Committee, and the panel's top-ranking Republican, Richard Shelby of Alabama, said significant changes are needed before the rescue plan can be passed. "We have got to look at some alternatives," Shelby said.

Getting the action right is key, Dodd said: "There is no second act to this." He later spoke disparagingly of the administration's proposal. "What they have sent us is not acceptable," he told reporters.

Bernanke's remarks about the risk of recession came in response to a question from Dodd, who seemed eager to hear a strong rationale for lawmakers to act swiftly on the administration's unprecedented request.

"The financial markets are in quite fragile condition, and I think absent a plan they will get worse," Bernanke said.

Ominously, he added, "I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way."

GDP is a measure of growth, and a decline correlates with a recession.

Across the Capitol, Vice President Dick Cheney and President Bush's top advisers met privately with restive House Republicans, some of whom emerged from the session unpersuaded.

"Just because God created the world in seven days doesn't mean we have to pass this bill in seven days," said Rep. Joe Barton, R-Texas.

Paulson was asked repeatedly why taxpayers should accept the burdens of a bailout.

"You worry about taxpayers being on the hook?" he replied at one point. "Guess what -- they're already on the hook." Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action is taken. Moreover, the flawed and outdated regulatory system, which didn't catch abuses, needs to be overhauled, he said.

To help win votes, Paulson agreed to speak to House Republicans early Wednesday, after which he and Bernanke must give a repeat performance before the House Financial Services Committee, an audience that could prove even more hostile than the Senate banking panel.

One of the tricky issues confronting policymakers is how to price the distressed assets that the government would ultimately buy.

Bernanke suggested buying the assets at a "hold-to-maturity" price, which would be based on an estimate of what the securities would eventually be worth as payments came in over the years.

In contrast, if banks use existing "mark-to-market" rules that require them to value the holdings at what similar securities have recently sold for -- in some cases pennies on the dollar -- it could make the whole bailout futile because it would hurt many banks' balance sheets, causing some to fail. "This creates something of a vicious circle," he said.